Is inflation still a problem for Latin America?

by moveforward on May 19, 2013

Could inflation lead to cracks in the Latin American economy?

Historically it is inflation which has been the biggest enemy of Latin America as it quite literally brought Brazil to its knees in the 1990s and pushed it towards the edge of bankruptcy. Many other countries across Latin America have also struggled to maintain relatively low rates of inflation and while the situation is perhaps more under control today that it has been for many years, is it still a problem?

Inflation is one of those elements of modern-day economics which very often lies dormant for some time and as soon as governments take their eye off the ball, bang! The reality is that inflation is a problem for every economy around the world, not just Latin America, although historically Latin America has suffered more than most from this phenomenon.

How does inflation compare today?

In general the rate of inflation across Latin America is pretty much under control although the recent, and ongoing, economic boom is beginning to put pressure on governments. The current rate of inflation in Brazil is approaching the central bank’s upper limit of 6.5% and the rate in Mexico is starting to tick higher at around 4.72%. While this compares very favourably to the official rate of 10.6% in Argentina, and the unofficial rate of 23.6%, it is still an element of the economy which needs to be controlled in the longer term.

Quote from Gringos.com : “While all eyes are on the health of President Hugo Chavez it seems as though some politicians are finally waking up to the problem of inflation which has hit 20% across Venezuela. It is believed that the government is ready to issue a number of anti-inflationary measures and “adjustments in some prices” as a means of trying to bring the economy back under control.”

If you put aside the situation with regards to Argentina, which we will cover later, it is interesting to see that for example the Brazilian and the Mexican governments comment on inflation on a regular basis. Historically economic growth has been put ahead of all other elements of everyday life across Latin America but inflation is in many cases now becoming the tail that wags the dog. If governments across Latin America are able to contain inflation and control spending going forward then in reality this makes for a perfect scenario for economic prosperity.

Could Argentina drag down Latin America?

In the 1990s it was Brazil which was the major headache across Latin America, and Mexico has also had its fair share of problems, but today it is Argentina which is catching the headlines. The unofficial rate of inflation in Argentina is 23.67% at this moment in time although the official rate is only 10.6%. Even if you were to look at the official rate and uses this as the basis of your calculations, it is still far too high compared to the rest of Latin America.

Argentina is going through something of a political and economic crisis and indeed there have been rumours of unrest in the public services sector, late payments from the government and indeed a recent amnesty on dollar deposits held overseas was announced by the authorities. If this was the situation 10 or 20 years ago it may well have had a major impact upon the opinion of international investors with regards to Latin America as a whole. However, while rest of Latin America seems well positioned for further economic growth, Argentina is something of an isolated case which needs immediate assistance from the international community.

Conclusion

It would be incorrect to suggest that inflation has been beaten and is not even a consideration for governments across Latin America. The reality is that while inflation is ticking higher in countries such as Brazil and Mexico it is still relatively under control and the authorities have the added economic levers of interest rates if required. Inflation is one of those elements of everyday life which can lay dormant for many years and all of a sudden hit you out of the blue. It is not only Latin American countries which have suffered in the past, many European and Far East governments have fallen into the trap of out-of-control inflation, and there is no doubt it can literally ruin prosperous economies and place governments on the edge of the financial abyss.